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Jewish World Review Feb. 19, 2002 / 7 Adar, 5762

Michael Barone

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Consumer Reports

Politics of the investor class

The big Enron story is not about political corruption or helpless employees. It's about whether Enron behaved fairly toward investors. --
The press has had a hard time covering the Enron story. At first, it tried to apply the template of political corruption. Enron employees and the company itself had made a lot of political contributions, mostly to Republicans, and reporters' working assumption was that the Bush administration must have done something for Enron in return. But it quickly became apparent that the Bush administration did nothing for Enron. It supported some policies supported by Enron, but it also opposed some policies supported by Enron, including the Kyoto treaty, which, as one Enron executive said in an internal memo, "would do more to promote Enron's business than almost any other regulatory initiative." Enron executives and, in one instance, former Clinton Treasury Secretary Robert Rubin, a top executive at Citigroup, to which Enron owed some $800 million, called Bush administration officials and, in some cases at least, asked them for help. The Bush administration officials turned them down flat. So the political corruption template turned out not to apply. As Emily Litella of Saturday Night Live used to say, "Never mind."

The second template was big-rich-executives-screw-the-little-guy. Here there were some facts to plug in. Enron executives had sold large amounts of Enron stock while its price was still high, usually in the course of exercising stock options. Enron employees who got Enron stock as the company's match in their 401(k) plans couldn't sell the stock until age 50. And no Enron employees could sell any stock during a 10-day period in fall 2001 when the company changed 401(k) managers. But even this amounted to something less than scandal. Employees could always (with the exception of that suspiciously timed 10-day period) sell the Enron stock in their 401(k)'s that they had bought with their own money. And the stock Enron matched with was in the nature of a gift: Nothing requires an employer to match a 401(k) contribution. Failure to place some limits on selling matched stock seems a reasonable way to prevent undue volatility in stock price-though the can't-sell-till-50 requirement seems a bit onerous.

There is room here to say that Enron executives behaved badly, especially when they talked up the stock even while its price was falling. But most held on to lots of Enron stock themselves–which they surely wouldn't have done if they had known it was headed to pennies a share. And the employees who put all their 401(k)'s in Enron stock were violating the first rule of sensible investment advice: diversify. There's an interesting story here, one that suggests arguments for changes in the law–but not a very big story.

The big story about Enron is one that the public, or at least the investing public, seems to have caught on to long before the media. That is one of the interesting findings of pollster Scott Rasmussen, who frequently conducts national polls in which the questions are asked and answers tallied by machine. It is an unorthodox technique and one that in 2000 showed slightly higher percentages for George W. Bush than other polls and the ultimate result; the results are reliable, in my opinion, if one keeps the error margin firmly in mind.

Rasmussen finds, in January and February 2002 surveys, that 78 percent of investors–people who own stock, bonds, or mutual funds–have been following the Enron story closely, as compared with 58 percent of noninvestors. (Other recent polls suggest that about half of American voters are now investors, a huge rise from the 20 percent or so in the early 1990s.) Investors' concern is directed not at whether Enron gained undue political influence or whether Enron biggies hurt Enron employees, but at whether Enron behaved fairly toward investors. And that, of course, is the big story. Since the SEC was founded in the 1930s, one of the strengths of America's capital markets is that publicly traded companies must provide accurate disclosure of their finances. Enron's failure to do that may very well result in criminal charges against some of its executives or the executives of its accounting firm, Arthur Andersen. Open questions are whether Enron's practices are widespread and whether government policy or accounting standards should be changed to prevent similar situations.

Investors believe that Enron's books were cooked: 80 percent believe auditors knew Enron's financial reports were inaccurate; 85 percent believe some Enron officials should go to jail. And investors suspect other companies are playing similar games. Some 65 percent believe that more than a few companies are making false financial reports; only 28 percent believe that that practice is limited to Enron and a handful of other companies. No wonder company executives and boards of directors are scrambling to avoid Enron-like practices. Directors are demanding that their firms' accountants cannot also be hired for consulting services; the Big Five accounting firms have decided, in some cases reluctantly, not to offer accounting and consulting services to the same company. Firms are busy restating earnings, even if that damages their market prices, lest their directors or executives be exposed to charges of fraud. The market is to a large extent self-regulating. Directors and executives want to shun practices that may leave them open to charges of criminal fraud. Investors want to shun companies that overstate earnings or understate liabilities.

What about public policy changes? Rasmussen asked respondents whether the government should place new restrictions on 401(k)'s "to ensure that they are invested wisely"; 63 percent said yes. But when he asked whether it would be a good idea to give workers more control over how to invest their own retirement accounts, 79 percent agreed. When asked to resolve the conflict between these two responses, 68 percent said that giving more control to workers is a better option than additional government regulation; only 18 percent said stricter regulation was the better approach. Interestingly, the group most favoring regulation, with 30 percent taking that position, was government workers.

What we are seeing here is the emergence of the politics of the investor class. The two templates that did not really apply to the Enron story recall old-fashioned struggles between big guys and little guys. The helpless member of the public vs. the big-bucks political insider; the helpless employee vs. the greedy big-bucks investor. But the real struggle here–the one with serious policy implications–is the struggle between the choice-making citizen-investor and the corporate insider willing to break the rules. When driven to a choice, most Americans today want the freedom to choose more than they want protection–opportunity more than security. They are willing to take risks, but they want to decide what risks to take on the basis of honest numbers. That is a fair thing to ask, and they may support changes in law that will do a better job of ensuring more honest numbers. But they don't want nanny-state protections that assume that they are helpless victims and can't make intelligent choices for themselves.

Michael Barone Archives

JWR contributor Michael Barone is a columnist at U.S. News & World Report and the author of, most recently, "The New Americans." He also edits the biennial "Almanac of American Politics". Send your comments to him by clicking here.


©2002, Michael Barone